In September 2009, the gold price managed to overcome the $1,000 barrier and rose to $1,900 only two years later. Thereafter, the price consolidated beneath the violet triangle-leg, whereas a so-called “breakout“ occurred in early 2012 when the price rose above the violet resistance at approximately $1,700. Recently, a so-called “classical pullback“ started to test and confirm the violet trendline as new support in order for the so-called “thrust“ to commence (a “thrust“ is the final movement of a triangular price formation – either a strong and longer-termed increase or decrease in price). Currently, the pullback has landed at the red support, whereas the apex of the (violet-green) triangle currently sits exactly at the 260-day EMA-curve at $1,616. Thus, a further correction to this level is possible, whereas a definite sell-signal is not given until breaching the apex of the triangle respectively the 260-day EMA.
The new upward-trend in gold started in 2001, whereas it fluctuated within the green trendchannel. In mid-2010, the uppermost (green) trendline was broken at approx. $1,600, whereafter the breakout went to $1,900. Since then, numerous pullbacks occurred to test and confirm the former (green) resistance as a new support (currently at approximately $1,700) in order for a new and longer-termed upward-trend to commence.
Looking at the XAU mining index since 1996, it can be noticed that a breakout out of the orange-green triangle started in 2003 at approximately 80 and rose to 220 points in 2008, whereafter a quick pullback to the apex of the (orange-green) triangle occurred. Thereafter, the thrust to the upside commenced having the general goal of transforming the high of the breakout (220 points) into a new support in order for a new and longer-termed upward-trend to start. As the price consolidates within the red-orange triangle since mid-2010, a strong buy-signal à la thrust to the upside is generated once breaking the red resistance currently at approximately 200 points, whereas another strong buy-signal is given once breaking and holding above the uppermost green trendchannel currently at approximately 220 points. A strong sell-signal is not given until breaching the green support at approximately 175 points as the risk of a thrust to the downside predominates thereafter.
The HUI mining index started its new and long-term upward-trend in 2001 fluctuating within the blue trendchannel, whereas strong price increases occur mainly after breaking above the orange resistances. Since the end of 2010, the HUI tests and confirms the uppermost orange trendline as a new support currently at approximately 480 points (strong sell-signal when breaching it concurrently with the blue trendchannel).
Taking a closer look at the HUI since 2008, it becomes clear that a sell-signal is generated when breaching the lowermost green trendchannel and the blue horizontal support at approximately 480 points. A strong buy-signal is given when breaking above the red resistance.
A bull market in resource stocks is known to be “healthy“ if the HUI outperforms the XAU, which is the case since 2003 as the HUI-XAU-ratio appreciates within the green trendchannel. In 2011, the uppermost green trendline was broken at approximately 2.70 points which – in general – is a very bullish sign. Yet, the pullback to this former resistance could not hold above this trendline. Thus, the bull market in resource stocks is anticipated to re-start strongly once the green resistance currently at approximately 2.75 has been broken. The 260-day EMA currently runs at 2.71 points meaning that a strong sell-signal is generated when breaching this crucial support.
Another sign for a “healthy“ bull market in resource stocks is given when the HUI outperforms the gold price as resource stocks typically appreciate two to five times as much as the price of gold (et vice versa meaning that if the gold price corrects, resource stocks correct two to five times as strong). The HUI-gold-ratio since 1996 has been moving up since 2001 within the green trendchannel, whereas it corrected sharply in 2009 and 2011. As the correction since 2011 has almost landed at the lowermost green support, we anticipate a strong rebound to the blue and red resistances any time now meaning that a new bull market in resource stocks is around the corner – if not breaching the green support as a strong sell-signal is generated then.
Stephan Bogner (Dipl. Kfm. in Economics) is a mining and commodity analyst with Rockstone Research Ltd, an independent research house specialized in the analysis and valuation of capital markets and publicly listed companies. The focus is set on the exploration, development and production of resource deposits. Please visit www.rockstone-research.com for further information, such as the disclaimer of the above article.